I have spent my whole life pointing out potential risks: in our economy, in the real estate market, and in the stock market. Too often, we pay special attention to the security of our assets while taking unnecessary options.
But sometimes you also have to consider the other side of the risk / reward coin. All assets have a buyer – if the price is low enough.
And I think that’s where the market is today among the commodities.
It is a matter of risk / reward.
Real estate prices are very high. Interiors of the Federal Reserve also say there is a bubble in commercial property. You have heard a lot of news from us and others about stock market concerns.
In the face of the risk and reward of these two sectors, well … the “reward” part, after a profit of more than six years, is used as much as a bottle of champagne in the morning after New Year’s Day.
The case of raw materials
Commodities are the other side of the asset coin. Of course, oil prices have doubled since the beginning of the year, and precious metal prices have risen by about 20%, but no one is close to their peak a few years ago. The rest of the raw material complex represents a mixed bag of similar results in 2016:
Copper:% + 1
Soybeans: + 8%
Sugar: + 50%
Nickel:% + 20
And look almost closely at the commodity price index or the exchange-traded fund, and you’ll see what I’m talking about. For example, the Dow Jones Commodity Index rose by only 23% earlier this year (mainly due to rising energy prices). But it has dropped by more than 30% since 2014.
It may seem strange to point to the low level of assets and say “put some money in,” but that’s why it’s worth looking at the commodity sector right now.
It provides an opportunity to diversify a portion of your wealth from stocks and assets. And best of all, the goods are unrelated – that is, they don’t march to the same drummer, they go up and down in price – like stocks and real estate.
But there is another way to think about it. For example, flipping the house and shopping for the day are in vogue again. But say “I like corn. It’s been at its lowest price in a decade” and all the sounds of silence (and maybe crickets) you’ll hear.
However, the old aspect says that “the best cure for high prices is high prices.” The best cure for low prices in the raw material complex? Yes – low prices. And growers, miners and other producers are pushing back to wait for demand to start again.
For example, Texas farmers are on their way to planting 20% less wheat this fall (after a 13% reduction in planting in the same period last year).
In the face of risk and reward, you can’t find an asset class that makes your neighbors and cocktail friends more valuable than merchandise. That’s a good thing. When an asset is unusual, even if it is hated, there is a chance to make a profit. The same cannot be said of current-level stocks and real estate.